The growth of Fintech, the use of technology in providing financial services, has accelerated rapidly since the 2008 global financial crisis (GFC). While Fintech provides both economic benefits and increasing levels of financial inclusion, it also comes with risks. These risks can affect individual users of new Fintech offerings or schemes that are fraudulent or susceptible to cyber-attacks. Importantly, the rapid rise of Fintech may also affect broader financial and economic systems.[1]

In a recent article, we examine the implications of the rise of Fintech for achieving effective cooperation in the area of financial regulation. While the disruptive and transformative impacts of Fintech pose significant challenges for domestic regulators, Fintech also presents opportunities to enhance cross-border regulatory cooperation. Cooperation is important because it helps regulators address territorial concerns that arise in an increasingly complex globalised market, but one that is primarily regulated by domestic agencies. These agencies have oversight over only a small part (the domestic part) of large businesses and inter-related global markets.[2]

IOSCO and the Proliferation of Enforcement MoUs

Because Fintech is a recent phenomenon, cross-border regulatory cooperation in this area is in its very early stages and is largely untested.

To provide insights into the way in which regulatory cooperation in relation to Fintech might evolve, we examine the experience of domestic regulators and the International Organization of Securities Commissions (IOSCO) in establishing a cross-border securities enforcement framework.

A key role of IOSCO and other transnational regulatory networks (TRNs) is to promote harmonisation and facilitate regulatory cooperation. While there are challenges faced by TRNs in facilitating convergence or harmonisation of laws and standards, there has been significant cooperation in relation to enforcement and investigations relating to securities.

The first examples of formalised cross-border cooperation in relation to securities enforcement were bilateral memoranda of understanding (enforcement MoUs), which gained prominence in the 1990s.[3] To support the drafting of such MoUs, IOSCO published general principles containing certain basic standards of cooperation in 1991, which eventually led to hundreds of bilateral and regional MoUs being concluded between IOSCO members.[4]

A key limitation of bilateral MoUs is that they do not constitute a broader framework in the area of financial regulation due to their limited reach.[5] In order to extend this reach, IOSCO adopted the multilateral memorandum of understanding (MMoU) in 2002. The key events that triggered a new approach to cooperation were the terrorist attacks of September 11, 2001, and the concerns that financial markets had been used for terrorist financing.[6]

While IOSCO members are able — and indeed encouraged — to enter into bilateral arrangements, the IOSCO MMoU serves as a floor for minimum obligations of members.[7] In providing a constructive framework for cooperation, the MMoU likely improves the effectiveness of global securities market governance, providing global welfare gains.[8]

Bilateral Fintech MoUs

In our article, we examine the recent trend of regulators establishing bilateral regulatory memoranda of understanding relating to Fintech (Fintech MoUs). Fintech MoUs are a very recent phenomenon — the first one was signed by the Australian Securities and Investments Commission (ASIC) and the UK’s Financial Conduct Authority (FCA) in March 2016. Over 30 Fintech MoUs have since been signed by regulators including the FCA, ASIC, the Monetary Authority of Singapore (MAS), the Hong Kong Monetary Authority (HKMA), and the council of the securities regulators of Canada’s provinces and territories, Canadian Securities Administrators (CSA). These agreements represent the first steps taken by regulators to establish formal agreements aimed at facilitating cooperation relating to Fintech and supporting innovation. The primary purpose of many Fintech MoUs is to establish a mechanism that enables the relevant authorities to refer businesses between their respective innovation functions and set out how the authorities plan to share and use information on innovation in their respective markets. Other MoUs deal just with information-sharing.

An examination of the Fintech MoUs reveals significant parallels between these new agreements and the enforcement MoUs, both in the structure of these agreements and their purpose, which is to establish a process for cooperation and assistance. It is apparent from the drafting that Fintech MoUs are modelled on the MMoU and the early bilateral agreements.

In another sense, however, Fintech MoUs are different. They represent a new form of regulatory cooperation that contains elements of both the earlier enforcement MoUs, as well as mutual recognition MoUs. Mutual recognition MoUs involve the regulator in one jurisdiction recognising the determination of a regulator in another jurisdiction for agreed purposes. The mutual recognition aspect implicit in Fintech MoUs is that, if a business meets the regulatory requirements for support to be provided by its home regulator, it is eligible to receive support from the foreign authority that is party to the MoU if a referral takes place — even where there are differences between their respective regulatory requirements.

Can Fintech MoUs Enhance Regulatory Cooperation?

It has been suggested that compared with efforts to achieve harmonised laws or standards, cooperation is more plausibly promoted by less formal arrangements, such as MoUs.[9] Indeed, even when regulators enter into an MoU in part because it is not legally binding, the existence of an agreement can create a “surprisingly effective arrangement between diverse regulators”.[10]

Fintech MoUs set up an initial framework that will connect Fintech businesses to regulators’ innovation hubs in other countries. This kind of direct support is likely to have a significant practical benefit for innovative businesses seeking to operate across borders. However, the usefulness of Fintech MoUs as a mechanism to foster cooperation on a broader scale—at least for now, when these agreements are only beginning to proliferate—is limited by their reach. The extent to which Fintech MoUs will be used by Fintech businesses will likely depend on the number of countries that have bilateral agreements with each other.

At this stage, it is too early to tell whether Fintech MoUs are working effectively, because little information is publicly available on the extent to which they are being used by businesses. Another challenge in evaluating the effectiveness of these arrangements arises due to the confidentiality provisions surrounding MoUs.

Are Fintech MoUs Only the First Step to Enhancing Regulatory Cooperation?

As we have seen, securities enforcement is an area where cooperation between regulators has played an important role in assisting regulators execute their domestic mandates by effectively extending their reach beyond their national boundaries.

The recent trend of regulators establishing Fintech MoUs suggests that regulators are looking to build on the success of past cooperative arrangements — such as enforcement MoUs and the MMoU.

However, Fintech MoUs represent only the initial steps toward achieving regulatory cooperation in this area. As observed by former IOSCO Chair Greg Medcraft, the benefits of Fintech MoUs would be enhanced if they evolved into a more extensive system, such as a regional or even global multilateral agreement, or passporting arrangements. Such a system would make it substantially easier for Fintech businesses to operate across borders.[11]

Enhanced cross-border regulatory cooperation in relation to Fintech is important because of the globalisation of markets and the disruptive nature of Fintech businesses. Several regulators and networks, including IOSCO and the European Commission, are considering ambitious initiatives aimed at enhancing regulatory cooperation in relation to Fintech. Coming at a time when agencies are under increasing scrutiny in the aftermath of the GFC, these developments are encouraging signs that those agencies are looking at new ways of enhancing regulatory cooperation in relation to Fintech.

Ultimately, the principal obstacle for effective cooperation relates not to the mechanisms available to the regulators but in their ability and willingness to use these mechanisms. Whether proactive use occurs may depend on certain factors. For example, it may be a challenge to achieve cooperation when the relevant – actual or merely perceived – national preferences conflict. Other challenges include legal obstacles, a reluctance by regulators to relinquish their responsibilities or control to another regulator (or network), or simply a lack of resources. In respect of Fintech, there may also be a tension among countries’ national preferences, because they compete to attract Fintech businesses and entrepreneurs, which may reduce the potential for effective cooperation among regulators.

That said, effective cooperation among regulators could also deliver significant benefits for regulators and Fintech businesses. In an era of globalised markets and increased connectivity via the internet, many innovative businesses will seek to expand by operating in more than one country — or even globally. Effective cooperation would also help regulators ensure that lawmaking and regulatory design is more proactive, dynamic, and responsive.

The significance of the challenges posed by Fintech may provide a strong impetus for legislators, regulators, and TRNs to embrace more ambitious models of regulatory cooperation, which has historically proved difficult to achieve outside the securities enforcement sphere. Indeed, if enhanced cooperation does occur, it would provide an example for other areas of financial regulation.

This post comes to us from Lev Bromberg, Andrew Godwin, and Ian Ramsay. Bromberg is a research fellow, Godwin is an associate professor, and Ramsay is the Harold Ford Professor of Commercial Law and director of the Centre for Corporate Law and Securities Regulation at the University of Melbourne’s Melbourne Law School. The post is based on their recent article, “Cross-Border Cooperation in Financial Regulation: Crossing the Fintech Bridge,” available here.